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How the 5 Biggest ETFs Fared in 2013

With 2013 almost over, it's a good time to look back and see how your investments performed during the year. For ETF investors, looking at the largest exchange-traded funds in the market can give you some clues about general trends that affected mainstream investors this year. With that in mind, let's take a look at the five biggest ETFs by assets under management: SPDR S&P 500 (NYSEMKT: SPY) , iShares Core S&P 500 (NYSEMKT: IVV) , iShares MSCI EAFE (NYSEMKT: EFA) , Vanguard Emerging Markets (NYSEMKT: VWO) , and PowerShares QQQ (NASDAQ: QQQ) .

When matching the market is a smart moveMany investors have given up on trying to beat the market indexes by using active management, and that strategy worked out well for investors in the top two ETFs, both of which track the S&P 500. The SPDR ETF gained 31.7% since the beginning of the year, while its iShares counterpart performed a bit better, climbing 31.8%.

Part of the reason for the difference likely comes from the fact that the iShares ETF charges just 0.07% in annual expenses, while the SPDR weighs in at 0.0945%. But other factors, such as the regular rebalancing of component stocks within the S&P 500, as well as occasional substitutions and replacements of one stock for another in the index, can cause disparities in returns, as well. Funds from different fund families handle these events using their own particular proprietary trading methods, and some of those methods work better than others in certain situations. All in all, though, both ETFs did a good job of matching up with the S&P's total return for the year.

International stocks underperformMeanwhile, the No. 3 and No. 4 ETFs on the list both invest internationally, and neither one did nearly as well as many ETFs that focused on U.S. stocks. The iShares MSCI EAFE ETF managed to gain almost 20% in 2013, with strong performance in the Japanese and European stock markets helping to produce what ordinarily would have looked like impressive returns if U.S. stocks hadn't done better still. One problem that weighed on the iShares ETF was that the U.S. dollar was extremely strong throughout much of the year against many major currencies, particularly the Japanese yen. That hurt the dollar-based returns for U.S. investors in comparison to their greater local-currency gains that Japanese investors enjoyed.

On the emerging market front, though, the news was far worse. The Vanguard Emerging Markets ETF fell more than 7% on the year, as poor performance throughout the major emerging markets of China, India, and Russia hurt the ETF's overall returns. Brazil, in particular, was a big drag on emerging markets, as a plunging Brazilian real worsened the impact of falling local markets on U.S. investors. With so many emerging-market economies reliant on commodities for their strength, the plunge in prices of many natural resources took their toll on the Vanguard ETF.

The Nasdaq tops the listEven though the PowerShares QQQ ETF is the smallest of the five ETFs here, it did the best, gaining almost 36%. The year 2013 was a blockbuster one for the tech-heavy Nasdaq 100, with big gains in several major technology stocks, as well as a huge recovery in the social-media space helping to lift the index. Interestingly, the broader Nasdaq Composite is the only one of the three major U.S. market benchmarks not to hit record highs in 2013, as it still lags well below the levels it hit in early 2000 at the end of the tech boom. With many tech stocks still trading at attractive valuations, though, further gains in the bull market could push the PowerShares ETF higher still.

The year 2013 showed how diversification, once again, did its job, with strength in the U.S. offsetting weakness internationally to provide solid returns for stock investors with diversified ETF portfolios. These five ETFs weren't the best performers in the ETF universe, but overall, a reasonable asset allocation using these ETFs provided attractive returns for investors in 2013.

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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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